Abstract
This article investigates the principal-agent problem in acquiring air quality monitoring data through the government hierarchy in China and uses Shandong as a case study for illustrating how it is addressed by resorting to a market approach. Adopting transaction cost economics perspective, we analyzed contractual hazards in both relying on the hierarchy and the market. We found the Shandong provincial environmental protection bureau has specified eligibility criteria and crafted contract terms that can reduce the risk of being held up resulted from asset specificity, increase efficiency, improve observability of both input and output quality, and induce accountability by enforceable rewards and sanctions. The lessons learned contribute to the literature on multi-level environmental governance and are useful for institution building for achieving sustainable development in China and beyond.
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